Fed Stands Pat, Declines to Cut Interest Rates : Economy: Decision was expected amid signs of recovery. Some analysts predict easing later this year.
The Federal Reserve Board on Tuesday declined to cut interest rates amid evidence that the economic recovery is strong enough not to need a shot in the arm.
However, economists were mixed on whether the Fed might ease rates later this year, with some suggesting a rate cut if economic growth slows.
Meanwhile, the Conference Board reported Tuesday that consumer confidence fell in September, with fewer households optimistic about the job outlook in light of recent economic data and corporate restructurings.
The Fed’s decision to keep interest rates at current levels was widely expected. After a closed-door meeting, central bank policy-makers indicated in a brief statement that they were leaving their target for the federal funds rate--the interest that banks charge each other--unchanged at 5.75%.
Stocks initially slipped on news of the Fed’s decision, but quickly bounced back to end without much change for the day. The Dow Jones industrial average eased 4.33 points to close at 4,765.60. The yield on the key 30-year Treasury bond fell to 6.57% from 6.58% on Monday.
The Federal Open Market Committee, composed of Fed board members and regional bank presidents, provided no clues after its nearly 4 1/2-hour meeting as to whether it might lower rates in the months ahead. The last rate cut was on July 6; the Fed’s last two meetings of the year are on Nov. 15 and Dec. 19.
Analysts who don’t expect another rate cut point to a rebound in home and auto sales, a drop in unemployment and signs of life in the nation’s beleaguered manufacturing sector as evidence that the long economic expansion has regained its footing and is not in need of further interest rate reductions.
“The Fed is patting itself on the back rather solidly right now,” said David Wyss, economist at DRI-McGraw Hill Inc. in Lexington, Mass., in advance of today’s meeting. “The economy is doing better than expected, and that means they don’t have to cut rates.”
However, some economists said more rate reductions are possible, especially if growth in coming weeks falls short of expectations. Further rate cuts now would mean a stronger economy in 1996, something that would be appreciated by a President running for reelection. Analysts noted that President Clinton must decide by March whether to reappoint Alan Greenspan as Fed chairman.
“Economically and politically, it makes sense for the Fed to get some more easing done in 1995,” said Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis.
The drop in the Conference Board’s consumer confidence index followed two consecutive monthly increases and was greater than some economists had expected.
The closely watched index stood at 97.4 points this month, down five points from August’s upwardly revised reading, though higher than the 89.5 index level of September, 1994. The index also rose in July.
Still, the Conference Board maintained that Americans had a relatively high degree of faith in the economy’s health. A separate survey of business executives released Tuesday by Dun & Bradstreet, another research group, said the majority of those polled expected higher profits and sales through year’s end.
“Despite this latest dip, the current level of consumer confidence has been historically associated with healthy economic activity,” said Fabian Linden, who heads the Conference Board’s consumer research center.
“The latest index reading reflects a modest U.S. unemployment rate and low inflation--circumstances that continue to be reassuring for the economy in the months ahead.”
The group’s index of consumer sentiment, calculated from a 1985 base of 100, is derived from responses to questions sent to 5,000 households each month. Consumers are queried on a number of topics, ranging from local job availability to car-buying plans.
Some economists consider it a useful barometer by some economists for anticipating the spending and borrowing patterns of consumers, who account for two-thirds of all economic growth.
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Consumer Confidence
The Conference Board, a business research group, said its index of consumer confidence declined to 97.4 in September from 102.4 in August. The index works off a 1985 base of 100.
